May 20, 2019 / 11:51 AM / 3 months ago

UPDATE 2-Euro zone bond yields up; Austria in focus as video sting brings down govt

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates move in yield)

By Virginia Furness

LONDON, May 20 (Reuters) - Euro zone government bond yields edged up on Monday from last week’s multi-year lows, with focus on Austria after the collapse of its coalition at the weekend raised the chances of a snap national election.

Austrian government bond yields rose 2.5 basis points to 0.23%, facing upward pressure after a scandal triggered the government collapse just days before European elections, slightly underperforming German bonds.

Austria’s two ruling parties descended into squabbling on Monday over how to muddle through until an early election after a video sting felled the leader of the far right and raised questions about whether its democracy had been corrupted.

Chancellor Sebastian Kurz pulled the plug on his coalition with the far-right Freedom Party on Saturday after its leader Heinz-Christian Strache, Austria’s vice-chancellor, was caught on video offering to fix state contracts with a woman posing as a Russian oligarch’s niece. Strache resigned.

The coalition’s downfall days before European Parliament elections is a blow to one of the most successful of the anti-immigrant, nationalist parties that have surged across the continent and aim to make big gains in the vote.

“Now right-wing parties are coming under pressure and Austria’s tax policies were driven by the chancellor, so now the fear of a more populist rising is being alleviated to some degree,” said ING rates strategist Benjamin Schroeder.

Austria’s 10-year bond yield has recently tracked that of the German Bund yields, which hit 2-1/2 year lows last week on escalating China/U.S.trade tensions, Italian posturing ahead of the EU Parliament elections and Brexit uncertainty.

In the absence of fresh drivers, yields on higher-rated bonds drifted higher on Monday. Germany’s 10-year bond yield was last up 2 bps -0.087%.

Trade tensions ratcheted up again on Friday, pushing U.S. Treasury and core euro zone bond yields slightly lower as traders sought safety in high-quality assets.

Italian bond yields were broadly higher, having briefly dipped in early trade, following the latest comments from Italian Deputy Prime Minister Matteo Salvini.

Salvini said European Union budget rules should be scrapped or eased because they hurt the European economy.

Salvini sent markets into a spin last week after saying that Rome should break the EU’s deficit ceiling of 3% of gross domestic product and push debt to 140% of GDP if necessary to lower unemployment.

Short-dated Italian bond yields were last up 4 bps at 0.66% , while 10-year bond yields were 3.5 bps higher at 2.70%.

Also in focus is the Netherlands, which is expected to issue the first AAA-rated sovereign green bond on Tuesday. (Reporting by Virginia Furness; Additional reporting by Dhara Ranasinghe; Editing by Gareth Jones and Ed Osmond)

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